Cole Taylor near deal to settle suits

A long legal feud between the founding families of Cole Taylor Bank is nearing a settlement, setting the stage for an overhaul that could include an initial public offering or other transaction by the bank.

Chairman Jeffrey W. Taylor confirms that an agreement is in the offing but not yet approved by the bank's board. "Right now, it would be premature for me to comment on it," he says.

Other sources say the settlement would be costly for the bank. If so, that would increase the likelihood of an IPO and/or the divestiture of bank assets to help pay for the settlement.

The litigation dates to 1997, when the collapse of Reliance Acceptance Group Inc., a publicly held Cole Taylor spinoff specializing in high-risk lending, prompted a flurry of lawsuits from the Cole family and other shareholders. At least one complaint, against the bank's legal counsel, Chicago law firm Katten Muchin Zavis, has already been settled.

Cole Taylor management met with consultants last week in Lake Geneva, Wis., to plot strategy. Although terms of the settlement could not be learned, stockholder losses in the Reliance bankruptcy totaled some $450 million, about 20 times Cole Taylor's earnings last year.

Known as a subprime lender, Reliance was once the Cole Taylor unit that financed car purchases by borrowers with spotty credit. Shareholders who filed class-action suits alleged that the Taylor family and other defendants misrepresented the condition of Reliance when it was spun off.

A three-sided legal battle ensued. Public shareholders of Reliance sued both the Taylor and Cole families. The estate of co-founder Irwin Cole, which owned 25% of Reliance, sued the Taylors separately.

An agreement between the Taylors and the Irwin Cole estate is contingent upon settlement of the class-action suits against both the estate and the Taylors, according to sources.

"It's the most complicated settlement I've seen in this area," says David B. Kahn, a plaintiffs' attorney in one of the class-action suits who pursued similar litigation against another defunct subprime lender First Merchants Acceptance Corp. of Deerfield.

Putting the litigation to rest would free up options for Wheeling-based Cole Taylor, a business lender that was publicly held before it went private as part of the Reliance spinoff.

While Cole Taylor has reported increased earnings for three consecutive years, its return on assets remains below the benchmark 1.0%. Yet it is solid enough to be an IPO candidate, say investment bankers.

Vulnerable target

With $2.3 billion in assets, the bank also is viewed as a potential takeover target, too small to be a long-term competitive force but too large to be a tightly focused community bank.

The Taylors, who include President and CEO Bruce W. Taylor, have argued otherwise. Indeed, it was their insistence that Cole Taylor's best days lay ahead that led to friction with Irwin Cole's daughter, Lori, who wanted to cash out in the mid-'90s by selling the company.

Instead, a compromise was struck that left the Taylors in control of the bank, while the Coles converted their stake to shares in Reliance, which was based in San Antonio, Texas. Ironically, subprime lenders like Reliance were then high-fliers  a lofty status that soon ended with the crash of Lake Forest-based Mercury Finance Co. in 1997.

In the lawsuit filed by Mr. Kahn's clients, the Taylor family and other defendants were accused of inflating the assets and income of Reliance by "grossly understating its bad-loan reserve." The suit added: "At the time of the shareholder vote (to spin off Reliance), defendants represented the finance subsidiary as a rapidly growing and profitable subprime lender when, in fact, it was technically insolvent."

An attorney for the Taylors, McDermott Will & Emery's Steven P. Handler, declined to comment, other than to say that the parties are finalizing a settlement. Lori Cole could not be reached for comment, and an attorney for the estate declined to comment.

Next step, IPO?

Still, it's clear the settlement won't come cheap. The bank probably will have to raise cash to cover the cost, which has prompted executives to consider an IPO or other transaction. While selling off loans or other assets might generate enough to settle the litigation, only an IPO would position the bank for growth in a consolidating market.

"They almost do need to go public, to take it to the next plateau in size," says Craig McCrohon, a corporate attorney with banking expertise at McBride Baker & Coles.

If Cole Taylor decides to pursue an IPO, it might have to wait out an equity market that has not been hospitable lately.

"It's like launching your boat in the middle of the storm," says Mr. McCrohon. "It doesn't mean you will sink; it doesn't mean you will arrive at your destination."

An alternate port could be the outright sale of the bank. Cole Taylor would make an attractive target for any one of several out-of-state banks looking to establish or expand a Chicago operation.

However, "the number of potential buyers is not going to be great," says Talon Asset Management Inc. President Alan Wilson, citing Cole Taylor's relatively high branch network costs. "This is clearly a weaker situation. The question is, can somebody buy it cheap enough?"